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International Review of Business Research Papers

Vol. 3 No.4 October 2007 Pp. 88-110

Firm Performance and Corporate Governance

Through Ownership Structure:
Evidence from Bangladesh Stock Market

Mahmood Osman Imam* and Mahfuja Malik**1

This paper examines how corporate governance is practiced through ownership structure
and how firm’s performance as well as its dividend payout policy is influenced by different
ownership pattern. In doing so, this paper attempts to investigate the pattern of
ownership mix and ownership concentration scenario towards sponsorship in
Bangladesh, the relationship between the ownership structure and firm performance and
finally the impact of ownership structure upon firm’s dividend payout policy. An analysis
has been made as evidence taking all listed non-financing firms from the Dhaka Stock
Exchange. There are several alternative corporate governance mechanisms, which may
play an important role to improve firm’s performance. Here ownership structure has been
considered as an effective tool of corporate governance. In this study, the relations
between firm’s return and value with ownership variables along with firm’s specific
variables controlling the industry effects have been examined. Using the data from two
sample points of 2000 and 2003, it is shown that a large fraction of cross-sectional
variation in performance, found in several studies, is explained by unobserved firm
heterogeneity, rather than the shareholders holding. Our empirical results provide
evidence that foreign holding is positively and significantly related to the firm performance
as measured by firm’s holding period returns and Tobin’s Q, and the relationship is a
monotonic one. We also provide empirical evidence that firms with high institutional
ownership and firms with concentrated ownership pay high and less dividend payout

Keywords: corporate governance, ownership structure, ownership

concentration, firm’s return, Tobin’s Q and dividend payout

Field of Research: Corporate Governance and Firm Performance

1. Introduction

The objective of this paper is to investigate the pattern and variation of ownership
structure of Bangladeshi listed companies and to document empirically the relationship
between firm performance and corporate governance through ownership structure. As a

* Dr. Mahmood Osman Imam, Professor, Department of Finance and Executive Director, Center for
Corporate Governance and Finance Studies, University of Dhaka, Dhaka-1000, Bangladesh, Email: ;

** Mahfuja Malik, Lecturer, Department of Finance, University of Dhaka, Dhaka-1000, Bangladesh

** Authors do have equal contribution to the paper.
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consequence, this paper deals with what impact does ownership structure has on firm
performance and dividend payout policy.

The need for corporate governance arises from the potential conflicts of interest among
participants (stakeholders) in the corporate structure. These conflicts of interest often
arise from two main reasons. First, different participants have different goals and
preferences. Second, the participants have imperfect information as to each other’s
actions, knowledge, and preferences. Jensen and Meckling (1976) addressed these
conflicts by examining the separation of corporate ownership from corporate
management. They noted that this separation, with the absence of other corporate
governance mechanisms, provides executives with the ability to act in their own self-
interest rather than in the interests of shareholders. Of the all corporate governance
mechanism that have been studied in US and UK, ownership structure is the one that
has probably been studied extensively in the rest of the world. This is probably because
in countries other than UK and US, corporate governance mechanisms like an active
market for corporate control, managerial labor market, stock-based managerial
compensation scheme, independent directors in the board, provision of executive
committee and audit committee chaired by independent director etc. are not very
effective in the setting of weak regulatory and legal framework, and in the absence of
full functioning of capital market. In this setting, governance through ownership structure
becomes the most important element of corporate governance. Bangladesh fits neatly
into this situation. Hence, this study investigates whether ownership structure has any
significant effects on the performance of the listed companies in Dhaka Stock Exchange
and firm payout policy. The listed companies allow us to quantify the ownership mix and
concentration and thus provide a unique opportunity for studying the above issue.

This paper attempts to identify the different dimensions that could predict the
relationship between firm’s performance and ownership structure after controlling for
firm’s specific variables and industry effects. Using the data from two sample points of
2000 and 2003, it is shown that a large fraction of cross-sectional variation in
performance, found in several studies, is explained by unobserved firm heterogeneity,
rather than the shareholders holding. Our empirical results provide evidence that foreign
holding is positively and significantly related to the firm performance as measured by
firm’s holding period returns and Tobin’s Q, and the relationship is a non-monotonic
one. We also observed the findings that firms with high institutional ownership and firms
with concentrated ownership pay high and less dividend payout respectively.

The paper is organized as follows: Section 2 provides underpinnings of the concept of

corporate governance followed by the literature review on ownership structure and firm
performance. In section 3 the hypotheses being developed focus the nature of
corporate governance through ownership structure along with firm’s specific
performance measured variables. In section 4 empirical models to test these
hypotheses are given. Next, in sections 5, 6 and 7, the data sources and sample
description, overview of ownership structure and concentration, and definitions of
variables are shown respectively. Section 8 elaborately explains the empirical results of
our main study. Lastly, all the findings about this study would help us to draw the

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ultimate conclusion about the impact of corporate governance practice through

ownership structure upon firm’s performance.

2. Corporate Governance and Overview of Ownership Structure

Corporate governance is an important effort to ensure accountability and responsibility
and a set of principles, which should be incorporated into every part of the organization.
Though it is viewed as a recent issue, there is, in fact, nothing new about the concept.
Because it has been in existence as long as the corporation itself – as long as there has
been large–scale trade, reflecting the need for responsibility in the handling of money
and the conduct of commercial activities. Corporate governance has succeeded to
attract a great deal of interest as it focuses not only the long-term relationship, which
has to deal with checks and balances, incentives for managers and communications
between management and investors but also the transactional relationship, which
involves dealing with disclosure and authority.

The corporate governance framework is the widest control mechanism, both internal
and external, to encourage the efficient use of corporate resources and equally to
require accountability for the stewardship of those resources. The challenge of
corporate governance could help to align the interests of individuals, corporations and
society through a fundamental ethical basis and it will fulfill the long-tem strategic goal
of the owners, which, after survival may consist of building shareholder value,
establishing a dominant market share or maintaining a technical lead in a chosen
sphere. It will certainly not be the same for all organizations, but will take into account
the expectations of all the key stakeholders, in particular: considering and caring for the
interests of employees, customers and suppliers, stockholders and debt holders, state
and local community, both in terms of the physical effects of the company’s operations
and the economic and cultural interaction with the population. So maintaining proper
compliance with all the applicable legal and regulatory requirements under which the
company is carrying out its activities is also achieved by sound practice of corporate

Theoretical position of corporate governance states that firm’s control by shareholders

should be raised as much as possible. Specifically, the essence of this position is to
straighten the surveillance of the stock market through such means as stockownership,
institutionalized monitoring by shareholders at general shareholder meeting and
corporate take over. In practical position, two distinct forms of governance system
separately developed for large corporations in economic and financial literature were
named as the Anglo-American type (outsider system) & the Japanese-German type
(insider system). There are a number of striking differences in concentration and nature
of ownership between both systems. For example, in a typical Continental European
country under Japan German system (majority) control is held by one shareholder or a
small group of interlocked (corporate) shareholders, whereas Anglo-American
companies are predominantly widely held. So the Anglo-American type is dominated by
shareholders interest through the market corporate control. On the contrary in the
Japanese-German type the large block of stable shareholding by financial institutions

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and the prevalence of interlocking shareholding effectively prevent hostile takeovers

and, hence, the average shareholder would seem to have very little influence. However,
these two systems work to the extent depending on financial structure of the country.

Corporate governance has received new urgency because of global financial crisis and
major corporate failures that shock major financial centers of the world. Research on
corporate governance across the countries has focused on diverse elements and
dimensions as the breadth and depth of it. In practice, corporate governance and
monitoring mechanisms recently focused on matters like the composition of the Board
of Directors, the duties and responsibilities of the executive directors, regular monitoring
by shareholders, anti takeover devices, voting rights of shareholders and detailed
disclosure of company information that are material for decision making by interested
parties. The corporate governance framework should protect and facilitate the exercise
of shareholders’ rights. Shareholders should have the right to participate in, and to be
sufficiently informed on, decisions concerning fundamental corporate changes.
Shareholders, including institutional shareholders, should be allowed to consult with
each other on issues concerning their basic shareholder rights as defined in the
Principles, subject to exceptions to prevent abuse. The equitable treatment of all
shareholders, including minority and foreign shareholders should be ensured by
corporate governance also. Minority shareholders should be protected from abusive
actions by, or in the interest of, controlling shareholders acting either directly or
indirectly. Stakeholders, including individual employees and their representative bodies,
should be able to freely communicate their concerns about illegal or unethical practices
to the board and their rights should not be compromised for doing this. Another
important responsibility of corporate governance is the timely and accurate disclosure of
all material matters regarding the corporation. Information should be prepared and
disclosed in accordance with high quality standards of accounting and financial and
non-financial disclosure. Board members should act on a fully informed basis, in good
faith, with due diligence and care, and in the best interest of the company and the
shareholders. The board should apply high ethical standards. Board members should
be able to commit themselves effectively to their responsibilities.

The public image of a corporation will quite accurately reflect the culture of that body. If
follows, then, that good corporate governance has to be in the bones and bloodstream
of the organization since this in turn will be reflected in the culture. Adherence to the
principle of good corporate governance serves to foster investor confidence and attract
domestic as well as foreign investors. But Bangladesh is sadly lagging behind in this
respect. Recently as a regulatory body, Securities and Exchange Commission,
Bangladesh strives to stimulate the listed companies comply the corporate governance
guidelines issued by them so that the suppliers of funds assure themselves of getting a
return on their investment. In case of any infringement of this effort, listed companies
have to show grounds with proper explanations in deed.

It is seen from the table of ownership holding by top five shareholders classified by
industry that ownership in Bangladesh is largely concentrated in a few hands especially

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in non-financial publicly listed firms. It is observed that these top shareholders belong
mostly to controlling family.

Ownership Concentration by Top Shareholders and Industry
Top 3 Top 5 Top 10
Shareholders Shareholders Shareholders
Industry (No.) mean median mean median mean median
Banks (23) 17.89% 11.43% 23.88% 16.22% 30.67% 26.50%
Engineering (19) 38.29% 37.37% 41.11% 38.19% 42.84% 40.87%
Food (32) 34.15% 31.33% 38.77% 36.61% 41.32% 38.76%
Fuel & Power (4) 37.72% 42.44% 41.06% 49.11% 43.52% 54.04
Jute (4) 38.82% 35.91% 40.31% 37.71% 41.83% 40.74%
Textile (39) 37.52% 35.47% 42.52% 43.99% 45.32% 47.77%
Pharmacutical (26) 38.94% 36.63% 41.78% 42.39% 43.86% 45.64%
Paper (7) 35.84% 36.58% 40.67% 45.49% 44.92% 50.00%
Service & Real
Estate(5) 50.65% 39.62% 54.34% 47.79% 56.56% 48.12%
Cement (8) 38.03% 37.12% 40.76% 42.82% 42.62% 50.22%
IT (6) 27.34% 28.50% 34.48% 32.44% 37.03% 38.89%
Tannery (8) 32.89% 31.12% 36.11% 33.10% 38.43% 38.42%
Ceramic (4) 36.11% 33.75% 40.30% 35.40% 40.30% 39.09%
Insurance (23) 13.70% 12.33% 19.96% 18.67% 31.94% 31.20%
Miscellaneous (10) 31.25% 36.20% 36.69% 39,73% 40.80% 40.76%
All (218) 32.33% 30.24% 36.96% 36.50% 41.06% 41.28%

2.1 Literature review on ownership structure and firm performance

Using 361 German corporations over the time period 1991 to 1996 Erik Lehmann and
Jürgen Weigand (February 2000) documented that (1) the presence of large
shareholders does not necessarily enhance profitability, and (2) the high degree of
ownership concentration seems to be a sub-optimal choice for many of the tightly held
German corporations. Their results also imply ownership concentration to affect
profitability significantly negatively. Their empirical evidence suggests that
representation of owners on the board of executive directors does not make a
difference. The negative effect of ownership concentration can be traced back to family-
or foreign-owned non-quoted firms as well as quoted firms with different large
shareholders. A positive impact of ownership concentration on profitability, supportive of
managerial discretion and agency theories, shows up for quoted firms, which have
financial institutions as large shareholders.

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Karl V. Lins (2002) investigates whether management ownership structures and large
non-management blockholders are related to firm value across a sample of 1433 firms
from 18 emerging markets. He finds that large non-management control rights
blockholdings (having more control rights) are positively related to firm value measured
by Tobin’s Q. He also provides evidence that large non management blockholders can
mitigate the valuation discounts associated with the expected agency problem.

In 1985, Demstez and Lehn argued both that the optimal corporate ownership structure
was firm specific, and that market competition would derive firms toward that optimum.
Because ownership was endogenous to expected performance, they cautioned, any
regression of profitability on ownership patterns should yield insignificant results.
Yoshiro Miwa and Mark Ramseyer (February 2001) stated with a sample of 637
Japanese firms and confirmed the equilibrium mechanism behind Demstez-Lehn.

Using a sample of 144 Israeli firms, Beni Lauterbach1 and Efrat Tolkowsky (June 2004)
find that Tobin's Q is maximized when control group vote reaches 67%. This evidence is
strong when ownership structure is treated as exogenous and weak when it is
considered endogenous.

Steen Thomsen and Torben Pedersen (1997) examine the impact of ownership
structure on company economic performance in the largest companies from 12
European nations. According to their findings the positive marginal effect of ownership
ties to financial institutions is stronger in the market-based British system than in
continental Europe.

Christoph Kaserer and Benjamin Moldenhauer (September 2005) address the question
whether there is any empirical relationship between corporate performance and insider
ownership. Using a data set of 245 Germen firms for the year 2003 they find evidence
for a positive and significant relationship between corporate performance, as measured
by stock price performance as well as by Tobin’s Q, and insider ownership.

Michael L Lemmon and Karl V Lins ( August 2003) use a sample of 800 firms in eight
East Asian countries to study the effect of ownership structure on value during the
region’s financial crisis. The crisis negatively impacted firm’s investment opportunities,
raising the incentives of controlling shareholders to expropriate minority investors. The
evidence is consistent with the view that ownership structure plays an important role in
determining whether insiders expropriate minority shareholders.

3. Hypothesis to be tested
This section provides an overview of the hypotheses. Regarding the determinants of the
firm’s performance the following arguments and hypothesis can be developed:

As ownership pattern varies across the firms, monitoring, controlling as well as

execution of disciplining decision also changes. Different firms have ownership pattern.
Some firms have sponsors as the largest shareholders; some have institutional or

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managerial ownership as major. Different shareholders influence firm’s decision making

differently. What the institutional owner can do may not be possible for the diffuse
general public holding. So ownership concentration and different ownership mix
contribute differently to the firms’ performance. This may lead the following hypothesis

Hypothesis 1: Ownership structure has an impact upon the firm performance

If sponsor shareholders are the majority, then they could try their best for personal
benefit. So this type of concentration creates agency problem between controlling
owner and minority shareholder. Minority shareholders fear the risk that they could be
expropriated of their rights through the collusion of manager and controlling blockholder.
Here, we assume sponsor ownership as a proxy variable of managerial ownership.
Shleifer and Vishny (1988) show in the context of managerial ownership that high
managerial ownership may entrench managers, as they are increasingly less subject to
governance by board of directors and to discipline by the market for corporate control.
From this empirical argument another hypothesis is taken.

Hypothesis 2: If the proportion of the sponsor ownership in firm’s capital

structure is high, it may have that minority stockholders will be deprived.

Firm’s size may be measured in terms of total asset, market capitalization or sales.
Whatever be the variable, higher the size, greater will be the operating as well as
financing efficiency of the firm, as the firm becomes quite mature through economies of
scale, production efficiency as well as managerial skill. Another hypothesis is made

Hypothesis 3: The greater the size of the firm, higher the firms performance

If the foreign holding in ownership structure increases, firm performance is positively

motivated and governed to be improved. Basically foreign holdings take place and are
increasing in those firms that have good governance and through these good
governance practice, firm will improve doing better for all of its stakeholders. Thus a
significant and positive relationship exists between firm’s return and foreign investment
in a non-financial firm. So it could be said that:

Hypothesis 4: Foreign holding is positively related with firm value and


Leverage promotes a firm to lower its cost of capital. So leverage is cost effective and in
another sense, the bondholders as well as the creditors will monitor more the
management for their own sake as they do have the fear of bankruptcy. So leverage
can be a proxy of corporate governance as there is a chance for more monitoring,
controlling and governing. This argument promotes the following hypothesis:

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Hypothesis 5: If leverage of a firm increases, it would improve the firm


Higher the listings age of the firm greater the efficiency, as the firms become matured
more to deal with capital market. Firm’s performance can also be influenced by firm’s
category. Better the category, more the firm is concerned about the stakeholders and
higher the firm’s efforts to its profitability, value, return and other performance. A
hypothesis is developed from it as follows:

Hypothesis 6: Firm performance is positively related with firm’s category and list

If the majority holders are the sponsors, they do try to govern themselves ignoring the
sake of other stakeholders. So the majority holder will try to gain personal benefit
protecting cash flow to be distributed as dividend to the other minority holders. It may
reduce agency conflict between management and major shareholders as they hold the
both place, but the other stakeholders and minority shareholders will be deprived
because of their entrenchment effect. It leads the following hypothesis:

Hypothesis 7: If sponsor ownership concentration is high, dividend payout will be


4. Model Specification
An empirical model is developed here to judge the relationship between firm’s
performance and ownership structure. Here, firm’s holding period return and Tobin’s Q
variables are used as the measurement of firm’s performance. The dividend payout
policy is also examines in this context. One thing is to be noted here that the meaning of
ownership structure is two-fold in this paper: ownership concentration and ownership
mix. It will then be compared the performance of firms with different degree of
ownership concentration as well as different types of shareholding pattern. For these
purposes, as mentioned earlier three dimensions (return, value and dividend policy)
have been used as dependent variables. The dependent (performance and payout)
variables are then regressed on concentration value and other ownership fractions such
as sponsorship, institutional holding and foreign govt. share.

Himmelberg et. al (1999) have argued that regression of firm performance on ownership
variables is potentially misspecified because of the presence of the firm heterogeneity.
Specially, if some of the unobserved determinants of firm performance are also
determinants of ownership, then ownership might spuriously appear to be a determinant
of firm performance. However, to provide primary evidence on the impact of ownership
structure on firm performance and dividend payout policy of listed non-financial firms in
DSE, this paper uses multiple regression technique with and without endogeneity
correction. Hence, combining the firm specific observable variables associated with

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share-holding pattern yields the following reduced form expression for the firm

Y it = α + β (∆ ownership) i t + δ X i t + γ (Industry) i t + ε i t

where, the dependent variable Yit measures firm’s performance, all Greek letters
represent coefficients of independent variables and it will describe the responsiveness
of dependent variable as a result of a change in that specific independent variable if the
other independent variables remain constant. ∆ ownership represents the changes in
ownership pattern of different types of share holding, Xi t represents firm- specific
effect, Industry i is dummy variable to control industry variations and ε i t represents
the error term. This is the basic generic equation on which the relationship between
ownership structure and firm performance is examined using our selected observations.

5. Data Sources and Sample Description

5.1 Sources of data

Data on required variables have been collected over the period from the documentation
of Dhaka Stock Exchange. Most of the information is collected from monthly review
published by DSE. Information about the selected firms is also gathered from the
publications “Balance Sheet Analysis of Joint Stock Companies listed on the Dhaka
Stock Exchange,” published by Statistical Department of Bangladesh Bank (2001-2002
issue). Those, which are not found in these sources, are collected directly from the
companies’ Annual Report documented in DSE and SEC.

5.2 Sample description

For the main analysis, non-financial firms from DSE are selected with the required data.
As the target is to find out the relationship between ownership pattern and non-financial
firm performance, banks, mutual funds and insurance companies are excluded. Here it
is considered 2000 - 2003 as observation period. In 2003 total numbers of firms
included in DSE are 259 but excluding the financial firms we do have 201 firms in
observation. Basically cross sectional analysis is done here. Panel data is not used
here; but to find out the effect of changes in ownership pattern upon firm performance
two time points, 2000 and 2003, are selected. That is changes in performance are
shown from 2000 to 2003 in contrast with the changes in ownership pattern for the
same time. But some firms had not been listed in 2000 and some were de-listed within
2001 to 2003, so for the failure of comparison we have to exclude 43 firms from the
observation list. Also for unavailability of information (as Annual Report were not
published) another 13 firms were excluded. So lastly there are 145 firms in our final
sample, for which we have required data. We restrict ourselves to firms, which have no
missing data (on age, ownership pattern, closing price of share, market capitalization,
leverage value, market category, EPS, DPS, P/E ratio, number of shares outstanding,
bonus share, right share and so on) for these years. We cannot avoid this conditioning
because we cannot use firms with missing data in our analysis).

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6. Descriptive Statistics of Data

The empirical data is based on the firm level for 145 Bangladeshi non-financial firms
listed in Dhaka Stock Exchange over the period of 2000 to 2003. Percentage share-
holding of different investors: sponsor ownership (SPON), govt. holding (GOVT),
institutional holding (INS), foreign holding (FOR) and general public (GP) are correlated,
because, these shares, along with the shares of other top shareholders and others not
included so far (which are not considered here) adds up to `100' and if one of them
increases then at least one of the others have to decrease.

Summary descriptive statistics relating to the data used in the analysis are shown in the
following table:
Table – 1
Descriptive Statistics

N Minimum Maximum Mean Std. Deviation Variance

SPON_00 145 .0000 81.9756 45.316646 15.2924544 233.859
SPON_03 145 .0000 97.6342 42.426612 17.6792148 312.555
GOVT_00 145 .0 96.2 1.913 11.2821 127.287
GOVT_03 145 .0 95.0 3.286 13.7855 190.040
INS_00 145 .0 53.6 13.255 12.7137 161.637
INS_03 145 .0 62.3 16.672 15.2149 231.493
FOR_00 145 .0 60.0 3.071 7.9243 62.795
FOR_03 144 .0 33.0 1.601 5.0981 25.991
GP_00 145 .7 83.6 36.419 15.5266 241.074
GP_03 145 .7 81.7 36.019 17.3941 302.556
EPS00 145 -159.6 167.3 4.750 34.4044 1183.664
EPS03 145 -525.0 293.9 5.602 62.8109 3945.215
DPS00 144 .0 65.0 6.854 10.6073 112.514
DPS03 145 .0 100.0 7.507 13.3315 177.728
CHNCAT 145 -2 2 -.43 .927 .859
Return 145 -93.118 209.618 3.05012 55.830506 3117.045
Valid N (listwise) 143

In Table 1 detailed data structure is presented to reveal the maximum, minimum, mean,
standard deviation and variance of the key variables. It shows that among our observed
firms, the highest portions of ownership concentration goes to sponsors and surprisingly
in 2003 sponsor concentrations in about 98 % of a firm. According to the mean,
sponsorship holding has been decreased from 2000 to 2003 (45.32 % to 42.43 %) on
an average, where the govt. holding as well as institutional ownership have been
increased. But at the same time foreign ownership is decreased remarkably from 3.071
% to 1.601%. Of course these changes would have an impact upon firm’s performance
as well as dividend payout policy. Now from the operating variable, we find that EPS
has a mean of 4.75 in 2000 and 5.60 in 2003 and it is increased. Though some firms
have EPS of 293 around, but because of negative earning of a numbers of firms in both
observation years, the mean of EPS is so low. Moreover, EPS in 2003 has the largest
standard deviations (62.81 %) among all the variables. Dividend per share is also

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improved from 2000 to 2003 (from 6.854 to 7.507). In 2003 data shows that the highest
dividend is 100 where lots of firms did not declare any dividend.

Another major variable in our observation is change in market category (CHNCAT). It is

to be noted here that in Bangladesh stock market, there are three categories of firms: A,
B and Z. From 2000 to 2003 we considered the positive change of one category to a
better one as assigned numeric value 1. Inversely the negative change that is shift to a
worse category is assigned a value of –1. So we find in descriptive statistics matrix that
some firms improved from Z to A, where some other had a demotion of A to Z category.
Here the overall mean of this category change is -.43. So the overall grading of the firms
has been declined from 2000 to 2003. The last variable in Table 1 is return, which is
holding period return from 2000 to 2003 has a large standard deviation of 56%.
Maximum return is 209.618 % where the minimum is –93.118 %. However, the average
return of our entire observed firm is 3.06 % only despite high volatility of the stock

7. Variables Definition
We considered the explanatory variables into three categories: ownership structure
related variables, firm’s specific variables and dummy variable to control industry
effects. Furthermore, in order to examine the underlying hypothesis, it must be
necessary to control for the possible determinants of firms performance not captured by
the ownership variables.
Dependent Variables
The key dependent variables of the interest for measuring firm performance are
RETURN (holding period return) and TOBINQ (Tobin’s Q value of the firm). Here
DPRATIO (Dividend Payout Ratio) is also used as another dependent variable to judge
the effect of ownership structure upon dividend payout ratio. The explanation and
formula used to measure these variables are given below:

(a) Return (holding period):

Holding period return is considered as a dependent variable. The return is
calculated from period 2000 to 2003. In this observation, not only cash
dividend but also bonus dividend is adjusted to current years share price. The
formula used here is as follows:

C P i 2003 - C P + Div i 2001 + Div i 2002 + Div

R iT (Holding period Return) = ( i 2000 i 2003
) * 100
CP i 2000

(b) Firm Value (Tobin’s Q):

Tobin’s Q formula is applied to calculate firm’s value. However, liquidated
value of preferred stock is excluded from the original formula, as Bangladeshi
firms have no preferred stock as usual. Market value of equity is calculated by
multiplying number of common stock outstanding and market value of each

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common stock. Thus a proxy for Tobin Q is applied to find out firm’s value.
So the formula becomes as follows:

Book Value of Debt + Market Value of Common Stock

Proxy for Tobin Q =
Total Asset

(c) Dividend Policy (Dividend Payout Ratio)

Dividend payout ratio is simply calculated Dividend per share divided by
earning per share.

Dividend per Share

Dividend Payout Ratio =
Earning per Share

Independent Variables
(a) Ownership related variables
On the other hand, ownership structure is measured from two points of view: ownership
concentration and ownership mix. A typical listed stock company in DSE has a mixed
ownership structure with the five dimensions. These are as follows:
a. SPON (Sponsorship)
b. GOVT (Government)
c. INS (Institutions)
d. FOR (Foreign-holding)
e. GP (Holding by general Public)
We attempt to show the regressed relationship as two different time periods to find out
the effect of changes. Therefore in final equation we have shown the changes in
ownership mix from 2000 to 2003. So the major variables used to define ownership
mix are: CHNSPON (Changes in Sponsorship), CHNGOVT (Changes in Government),
CHNINS (Changes in institutions), CHNGFOR (Changes in Foreign-holding) and
CHNGP (Changes in Holding by general Public). Ownership structure is also examined
alternatively from the point of ownership concentration. Here for the term
concentration, we do mean by sponsorship concentration. We have taken a dummy
variable OWNCON as the value of one when share-holding percentage by the sponsor
is the largest among all the equity holders and zero otherwise.

(b) Firms’ specific variables

We further add some explanatory variables that are also responsible for performance
discretion as well as to control for firm-specie heterogeneity. These are LISTAGE
(Listing Age), LN_SIZE (natural logarithm of market capitalization), CHNCAT (changes
in market category), LEVERAGE (long term and short term debt to total asset), EPS
(earning per share) and DPLAG (dividend payout ratio in previous year).
(c) Industry Dummy Variables
Industry dummy variables are taken to control industry effects according to the industrial
sector categorization. We have taken 10 dummy variables for 11 industrial sectors:
INDDUM1 for Engineering industry, INDDUM2 for Food and Allied Products industry,

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INDDUM3 for Fuel and power, INDDUM4 is for Jute, INDDUM5 is for Textile, INDDUM6
for Pharmaceutical and Chemical industry, INDDUM7 is for Paper and printing,
INDDUM8 is for Service and real state Sector, INDDUM9 is for Tannery, INDDUM10 is
for Ceramic and INDDUM11 is for miscellaneous sectors.

8. Empirical Findings of the Impact of Corporate Governance

through Ownership Structure upon Firm Performance
In this section the impact of corporate governance through ownership structure upon a
firm performance is judged from two points of views. One is the relationship between
firm performance and ownership structure, which include ownership mix and ownership
concentration towards sponsors also. Another is the influence of ownership pattern on
dividend payout policy. Two measurements of firm performance are used. One is
holding period return and another is firm value measured by Tobin’s Q.

Through partial correlation analysis between the independent variables controlling for
other firm’s specific variables, it is found that correlation coefficients between the
independent variables are significantly high enough to have multicolinerity problem.
Thus multicolinearity problem is faced in two cases. One is in between changes in
sponsorship (CHANSPO) and changes in government owning portion (CHANGOV).
Another is in between changes in institutional holding (CHANINS) and changes in public
owning portion (CHANPUB). This type of multicolinearity problem can be removed by
using only one of the highly interrelated variables in the final equation or to create and
use a new variable that is a combination of two highly interrelated variables. Here, the
first solution is applied and that’s why two variables CHANGOV and CHANPUB are
excluded. However, different models, which are explained in the following sections, are
enlightened to draw the finales.

8.1 Analysis of firm’s performance & ownership structure

(a) Return as dependent variable

To show the influence of corporate governance practice upon the holding period return
through ownership structure, three models are used. The multiple regression equation
to be applied under these models is as follows:
RETURN i t = α + β1 CHANGSPONSOR i t + β2 CHANGINST i t + β3

CHANGFORG it + δ1 CHANGCAT it + δ2 LEVERAGE it + δ3 LISTAGE it + δ4 SIZE it +


∑ γ INDUSTRYDU M i j t + ε i t ......................................................................... equation (1)

j =1

Equation 1 is the basic equation to judge the relationship between firm’s return and
ownership pattern. Here dependent variable RETURN is holding period return from
2000 to 2003. Ownership related explanatory variables are CHANGSPONSOR,

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CHANGINST and CHANGFORG. These are changes in ownership holding in sponsor,

institution and foreign holding respectively from 2000 to 2003. There are also some
firm’s specific variables. These are LEVERAGE, which is the ratio of total liability and
total debt, LISTAGE means time period between the years the firm listed to 2003 and
another firm related variable is SIZE. It is natural logarithm of market capitalization of a
firm. And lastly 10 industry dummies are taken to control for 11 industrial sectors.
Table 2
Firms’ Performance and changes in ownership structure
Dependent Variable is Return (Holding Period Return)
Model 1 Model 2 Model 3
Constant -27.87 -30.901 -48.977
t Statistic (-1.102) (-1.123) (-1.783)
p value (0.273) (0.220) (0.077)
∆ in Sponsor Ownership -0.093 -0.419 -
t Statistic (-0.188) (-0.814) -
p value (0.851) (0.417) -
∆ in Institutional Ownership 0.171 0.233 -
t Statistic (0.349) (0.480) -
p value (0.728) (0.632) -
∆ in Foreign Ownership 1.412 4.568 -
t Statistic (1.853) (2.524) -
p value (0.066) (0.013) -
∆ in Foreign Ownership2 - 0.071 -
t Statistic - (1.918) -
p value - (0.058)
Ownership Concentration - - 13.066
t Statistic - - (1.502)
p value - - (0.136)
ln Size 5.253 6.326 3.026
t Statistic (1.510) (1.816) (0.944)
p value (0.134) (0.072) (0.347)
∆ in Firm Category 28.178 29.232 25.589
t Statistic (5.404) (5.639) (4.944)
p value (0.000) (0.000) (0.000)
Leverage 0.176 1.660 0.15
t Statistic (-0.016) (0.155) (0.014)
p value (0.987) (0.877) (0.989)
Listing Age 0.823 0.761 0.835
t Statistic (1.028) (0.961) (1.070)
p value (0.306) (0.339) (0.287)
Adjusted R2 0.281 0.247 0.293
F Statistic 4.030 4.044 4.678
p value 0.000 0.000 0.000

Here three models are considered. We have taken ownership mix in model 1, in model
3 ownership concentration is taken instead of ownership mix and in model 2 the non-

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linear tendency in foreign holding ownership are also considered as ownership related
variables in equation 1. In model 2, first explanatory variable is OWNCON means
ownership concentration, β1 is then the coefficient of ownership concentration.
Basically ownership concentration (OWNCON) is one type of dummy variable and it has
the value of one when share-holding percentage by the sponsor is the largest among all
the equity holders and zero otherwise. All the models have the satisfactory explanatory
power with 25% to 30% of the variation in firms return. The relationship between
changes in sponsorship holding and firm’s return are negatively correlated and it is not
statistically significant in both models. On the other hand, institutional holding shows a
positive relation with firm return but the coefficient is not statistically significant. Foreign
holding is no doubt positively and significantly related with firm’s return in model 1 and
has significant non-linear relationship with firm return in model 2, in which the square
term of foreign holding is incorporated. It can be argued that foreign holding takes place
and is increasing in those firms that are supposed to have good corporate governance
and better performance. Because of monotonic relationship, higher the portion of
foreign holding in the firm, better will be the motivation for the firm to maintain good
corporate governance culture and consequently price performance of the firm will be

(b) Firm’s value as dependent variable

To show the influence of corporate governance practice through ownership structure
upon the firm value, two models are used on the basis of the following multiple
regression equation:

FIRM_VALUE i t = α + β1 CHANGSPONSOR i t + β2 CHANGINST i t + β3

CHANGFORG i t + δ1 LEVERAGE i t + δ2 LISTAGE i t + δ3 SIZE i t +


∑ γ INDUSTRYDU M i j t + ε i t
j =1
i ..................................................................... equation (2)

In equation 2, FIRM_VALUE (firm values), computed by the proxy of Tobin’s Q, is used

to measure firm performance. All other explanatory variables of ownership pattern along
with firm specific variables and industry dummy variables have been kept as it is in
equation 1. Under equation 2 two models are used. The regression results of equation 2
are given in Table 3.

In Table 3, both the models have the high explanatory power with model 1 and model 2
explaining 74 % and 62 % of the variation in firm value respectively. Both the models
specification seem to suggest that ownership is positively and significantly related to
firm value. In model 1, foreign holding does have same statistically non-linear
monotonic relationship with the firm value as it was observed with firm performance.
OWNCON (ownership concentration) towards sponsorship is used instead of ownership
pattern. Here we find significant and positive correlation between ownership

Imam & Malik 103

concentration and firm’s value. This might be because of increased belongingness of

the managers as here sponsor ownership is considered as the proxy for managerial
ownership. All other firm related variables including leverage, a CG variable, are
positively related and they are all statistically significant too.

Table 3
Firms’ Performance and ownership structure
Dependent Variables is Tobin’s Q
Model 1 Model 2
Constant -.352 -0.727
t Statistic (-2.241) (-3.632)
p value (0.027) (0.000)
Ownership Concentration - 0.210
t Statistic - (3.103)
p value - (0.002)
∆ in Sponsor Ownership 0.001 -
t Statistic (0.007) -
p value (0.994) -
∆ in Institutional
Ownership 0.003 -
t Statistic (0.012) -
p value (0.991) -
∆ in Foreign Ownership 0.056 -
t Statistic (4.702) -
p value (0.000) -
∆ in Foreign Ownership2 0.002 -
t Statistic (6.748) -
p value 0.000 -
Size 0.146 0.153
t Statistic (6.403) (6.166)
p value (0.000) (0.000)
Leverage 0.969 0.970
t Statistic (14.206) (12.052)
p value (0.000) (0.000)
Listing Age 0.013 0.015
t Statistic (2.594) (2.475)
p value (0.011) (0.015)
Adjusted R2 0.737 0.626
F Static 22.780 16.923
p value 0.000 0.000

8.2 Analysis of firm’s dividend payout policy and ownership structure

The presence of agency conflict and information asymmetry makes dividend value
relevant. In a country where ownership is diffused and managers holds very little equity
stake, higher dividend payout is a means through which agency cost of managerial
misdeed can be minimized. However, once manager accumulates a large stake of

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equity, it is expected that managerial interest will align with that of the outsider and
hence the role of dividend as an agency cost mitigating mechanism will assume less
important. On the contrary, if the entrenchment effect dominates then dividend payout
could turn out to be a monitoring device.

La Porta, Lopez-de-Silanes, Shleifer and Vishny herein known as LLSV (2000) argues
that the controlling blockholders can effectively monitor manager (as managers may
typically come from controlling family), and thus reduce the problem of managerial
control and agency. Even then, the controlling shareholders can implement policies that
can benefit themselves at the cost of minority shareholders. In order to improve the
image of controlling blockholders that the minority shareholders are not being
expropriated by them, managers pay more dividends.

To show the impact of corporate governance practice through ownership structure upon
the firm’s dividend payout policy, three models are considered on the basis of the
following multiple regression equation:

DIV_PAYAOUT i t = α + β1 CHANGSPONSOR i t + β2 CHANGINST i t + β3

CHANGFORG i t + δ1 EPS i t +δ2 LEVERAGE i t + δ4 SIZE it + δ2 LAGDIV i t +


∑ γ INDUSTRYDU M i j t + ε i t
j =1
i .................................................................. equation (3)

In equation 3, firm’s dividend payout ratio (DIV_PAYOUT) is considered as dependent

variable and it is calculated by dividend per share divided by earning per share. In
model 1, the changes in ownership pattern (from 2000 to 2003) are taken as the major
ownership related variables. Here other firm’s specific variables SIZE, EPS, TOBIN”S Q
and LAGDIV are also controlled as these factors are expected to be associated with
dividend payout ratio. Model 2 is also same as model 1 by using ownership mix but here
the variable LEVERAGE is included instead of TOBIN’S Q. In third model, OWNCON is
used as an explanatory variable instead of ownership mix. Basically ownership
concentration (OWNCON) is one type of dummy variable and it has the value of one
when share-holding percentage by the sponsor is the largest among all the equity
holders and zero otherwise. Here industry dummies are taken to control industry
variations. The most important factor affecting dividend payout is LAGDIV, which
denotes the dividend payout ratio in previous year. Result of equation 3 is given in
Table 4.

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Table 4
Dividend Policy and Ownership Structure
Dependent Variables is Dividend Payout Ratio
Model 1 Model 2 Model 3
Constant -0.188 -0.149 0.481
t Statistic (-0.221) (-0.160) (0.552)
p value (0.825) (0.873) (0.582)
∆ in Sponsor Ownership 0.004 0.005 -
t Statistic (0.367) (0.441) -
p value (0.714) (0.660) -
∆ in Institutional Ownership 0.056 0.056 -
t Statistic (3.350) (3.293) -
p value (0.001) (0.001) -
∆ in Foreign Ownership 0.022 0.019 -
t Statistic (0.865) (0.750) -
p value (0.389) (0.455) -
Ownership Concentration - - -0.245
t Statistic - - (-0.783)
p value - - (0.435)
SIZE 0.006 0.019 -0.043
t Statistic (0.058) (0.167) (-0.419)
p value (0.954) (0.868) (0.676)
Leverage - 0.117 -
t Statistic - (0.340) -
p value - (0.734) -
EPS 0.002 0.002 0.002
t Statistic (0.467) (0.616) (0.499)
p value (0.641) (0.539) (0.619)
Tobin’s Q 0.182 - 0.048
t Statistic (0.682) - (0.181)
p value (0.497) - (0.857)
Lag Dividend 0.421 0.420 0.461
t Statistic (6.749) (6.722) (7.309)
p value (0.000) (0.000) (0.000)
Adjusted R2 0.328 0.326 0.276
F Static 4.699 4.664 4.309
p value 0.000 0.000 0.000

Results show that there exists significant relationship between changes in institutional
ownership pattern and dividend payout ratio. The relationship is positive, implying that
institutional holding creates more monitoring and controlling upon firm and thus it can be
judged as a proxy of corporate governance practice. Looking at the determinants of
corporate control mechanisms, many studies argue convincingly that the role of large
institutions in corporate governance is particularly important in countries where legal

Imam & Malik 106

protection of shareholders' interest is weak for historical and institutional reasons---a

situation exists in many transition economies. So institutional ownership holding may be
an effective and successful control mechanism for good corporate governance in those
situations. However, the relationship between changes in sponsorship holding and
changes in foreign holding is not significant. One thing we found is to be noted that
there is negative relationship between ownership concentration and firm’s payout ratio
in model 3. The reason may be that the concentrated majority sponsor holder will try to
gain personal benefit protecting cash flow to be distributed as dividend to the other
minority holders. Another explanation could be that if ownership structure is associated
with firm agency cost, then higher concentrated ownership level results in lower agency
costs and hence lower payout policy. Though the co-efficient of ownership
concentration is not statistically significant, Habib (2004) and Mollah et al. (2000) find
similar findings that ownership concentration and insider ownership are negatively
related to dividend payout respectively.

9. Summary of Findings and Conclusion

This paper has examined the underpinnings of the concept of corporate governance
and provides empirical evidence on the nature of corporate governance through
ownership structure in the context of Bangladesh. It does also reveal the pattern of
ownership mix and ownership concentration scenario towards sponsorship in
Bangladesh, the relationship between the ownership structure and firm performance
and finally the impact of ownership structure upon firm’s dividend payout policy. The
results presented, in this study suggest that, for Bangladeshi non-financial corporate
firms, performance and sponsor ownership is negatively related and in case of the other
dimensions it is positively related, but the result except foreign holding turns out to be
insignificant. Firm performance and foreign holding is positively related in all equation
and the relationship is nonlinear monotonic one. Basically, foreign holdings are
increasing in those firms that have good governance and through these good
governance practice firm will improve by doing better for all of its stakeholders. But
again we found a positive relationship between institutional holding and ownership
concentration on the one hand and firm performance on the other. The argument might
be that in particular firms’ profitability is positively and significantly correlated with the
fraction of legal person shares, suggesting that large legal person shareholders
(institutional investors) have the incentive as well as the power to monitor and control
the behavior of the management, and have played a significant role in corporate
governance. The result is robust when indicators of both concentration and ownership
mix are included in the regressions. The results are largely consistent with those of
Claessens (1995) and Claessens, Djankov and Pohl (1996). Comparative studies show
that in OECD countries ownership and control rights are increasingly concentrated in
the hands of financial and nonfinancial institutions. The driving force behind this trend
seems to be related to the benefit of ownership concentration as a direct measure of
corporate control and other factors.

Imam & Malik 107

Though we could not get the chance to establish the relationship between institutional
holding and firm performance but it is observed here that firm’s dividend payout ratio
and institutional ownership is significantly related as role of large institutions in
corporate governance is particularly important in countries where legal protection of
shareholders' interest is weak for historical and institutional reasons-- a situation exists
in many transition economies. Here, we also find that a large fraction of cross-sectional
variation in share-holding pattern is explained by unobserved firm heterogeneity. First, it
is suggested that the unobserved heterogeneity has important implications for
econometric models, to estimate the effect of share-holding pattern on firm
performance. Second, it is suggested that there could be endogeneity of ownership in
transition economies -- it could be the case that institution owners can choose to buy
shares in better performing firms, and leave all poorly performing ones in the hands of
the pubic. The problem of reverse causality needs to be addressed. Does ownership
affect performance or causality runs from performance to ownership?

Here, political argument, inadequate legal protection for minority shareholders or private
benefit of control deserves careful investigation for the explanation of the variations in
ownership structure of Bangladeshi listed firms. In the context of Australia, Lamba and
Stapledon (2002) provide evidence that related party transactions give rise to private
benefits of control and that could explain why ownership structure is concentrated in the
hands of few family members. However, given the results produced by the current
study, it is clear that there are many questions relating to the relationship between share
holding pattern and performance of the firm, which remains unresolved. One other
useful extension of this analysis would be to include additional policy variables
measuring changes in the market conditions, political and legal scenario identity of the
top shareholders and other dimensions to judge agency conflict. It is pertinent to know
whether there exist any large non-management blockholders among the top
shareholders. This is important because this blockholder could either both monitor
management and help protect minority shareholders or collude with management to
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